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ACCA_AFM mind map

Passed all ACCA subjects, and passed 3 AAA SBR AFM in one test in the July 2020 exam season. Please share your notes for protection. AFM is relatively simple and there are not many notes. Please pay attention to the AAA and SBR notes.

Edited at 2021-08-19 20:38:55

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ACCA_AFM mind map

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Outline

AFM

Advanced financial management

revision

objective

maximum the shareholder wealth measured by dividend yield and capital gain

cover the cost of capital and leave surplus to shareholder

Maximize through 4 aspects: investment, financing, dividend, risk management

Financing must consider leverage. Factors that affect leverage include life cycle, operating gearing, stability of revenue, and security (collateral). It is asset-intensive, has many mortgage assets, and is easy to borrow.

WACC cost of capital

cost of equity - CAPM

cost of debt - IRR calculates cost of debt as %

cost of preference shares - equivalent to perpetual bonds

DCF

p15 example questions

advanced investment appraisal techniques

IRR&MIRR

The assumption of IRR is flawed. It assumes that the cash flow received can continue to be invested at the same IRR rate and obtain the same rate of return. Cash flow after the investment phase are reinvested at the project's IRR, e.g. See argument on p16

MIRR is equivalent to = (WACC discounted pv÷cost) raised to the power of the number of years to get the average annual return rate. Then × (WACC 1)-1, we get the internal rate of return of excess return based on WACC reinvestment

Risk and uncertainty

risk is predictable, uncertainty is not predictable

duration duration

PV of each year and PV of total return weighted, × year. Cost does not need to be included in the calculation

recover half of the present value of the project. The longer the duration, the longer the recovery time and the greater the uncertainty.

value at risk

normal distribution, confidence level, you need to be able to look at the normal distribution table

advanced cost of capital

In fact, it is the various elements in the WACC calculation formula.

The current stock price reflects two kinds of risks, so the βe measured by the backtest reflects these two risks. After reducing the leverage, the βa obtained is the pure commercial risk of all companies in the industry, and after adding the leverage of the target company or target project, the βa is obtained. unique βe'

However, a company may not only be involved in one industry, so it is not appropriate to use βa calculated by another company.

Therefore, we need to use the idea of business risk weighting, which is actually beta weighting, p33

capital structure

traditional theory

U-shaped curve, with the lowest cost of capital in the middle

MM theory

Under the no-tax assumption, liabilities have no impact Under tax conditions, the more debt there is, the greater the tax deduction will be

bond valuation and bond yield

duration

measure the sensitivity of bond prices to changes in interest rate The longer the duration, the stronger the volatility

modified duration D/(1 r)

term structure of interest rates and the yield curve Interest rate term structure and yield curve

p49 example questions

Yield to maturity asks about IRR, and the one calculated in a single year is yield curve or spot rate.

adjusted present value

Different cash flows use different discount rates to separate investment and financing.

p72

The cash flow of investment uses kei and βa to calculate the discount rate; the cash flow of financing uses kd

kei algorithm for investment cash flow

βa → CAPM → kei, directly discount with kei instead of WACC

Ke = Kei (1-t)(Kei - Kd)Vd/Ve, in the formula book

financing cash flow

There should be only one question in KD, just make sure you choose correctly.

issue cost = 2/98 x investment tax shield = investment x interest rate x n/12 x T This is the tax shield Subsidy benefit = investment x interest rate x n/12 x (1-T) The amount of preferential income is subject to tax deduction

It should be noted that in financing, there will be interest payment every year / equal payment every year. The two types must be distinguished.

overseas investment

p91

Acquisitions and merges

business valuation

It is divided into absolute valuation and relative valuation. Please refer to the examples for details.

p129

mergers and acquisitions

The knowledge points are very fragmented and are basically the content learned by senior financial management.

p142

financing

Financing during the acquisition process

cash

cash retained from earning, debt issue, bank loan, mezzanine finance mezzanine financing

Convertible bonds are for the public, while mezzanine bonds are non-standardized contracts for private parties.

paper

share exchange, convertible debt

p162

Corporate reconstruction and reorganization

reconstruction schemes

The knowledge points for text questions in Chapter C are only p166~p172

financial reconstructions

Mainly to change the company's capital structure

leveraged buy-outs

Purchase part of the business from shareholders and make it a wholly-owned subsidiary

If it is bought by management, it is MBO.

leveraged recapitalization

Leverage up

debt for equity swaps

debt-equity swap

portfolio restructuring - unbundling

do subtraction split

demergers

Or called spin-off, which is the opposite of a merger, but the shareholder ownership does not change, it is just a spin-off.

sell-off

It was dismantled and sold to a third party other than shareholders.

MBOs & MBIs

To management & to people outside shareholders and management

organizational restructuring

Organizational structure adjustment, mainly focusing on the first two

Summary of examples

p173

advanced risk management

Standardized calculation of risk

Word question about risk

Mainly read the textbook, the ideas in the textbook are already very logical. The textbook mainly combines topics to understand knowledge points. The mind map is only for establishing the overall framework and is not used for main review.